Hong Kong Banks Face 'Significant' Headwinds: KPMG

After a robust 2011, when loan growth came in at 14 percent, Hong Kong’s banking sector will be facing “significant” headwinds this year as demand for credit slows and low equity-raising activity by corporates crimp revenues, according to consulting firm KPMG.

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The International Finance Centre in Hong Kong.

In a report released on Wednesday, KMPG said economic uncertainties are preventing companies from borrowing and investing the way they did in 2011. The benign credit environment which boosted banks’ results last year is therefore unlikely to continue, the firm added.

“There are headwinds and there is pressure,” Paul McSheaffrey, Partner of KPMG in Hong Kong, told CNBC Asia’s “The Call”. “Revenue pressure really is a concern for a number of industry participants we talk to. Margins on lending are low, remain low and given the economic environment with U.S. rates looking to stay at these levels probably into 2015, most margin pressures are going to remain.”

Banks have been forced to slash rates charged for loans as demand for credit falls. Already, interest rates in Hong Kong, which trackU.S. rates, are at record lows.

To compensate for these low margins from loans, banks have also needed to generate income that doesn’t come from loans and that is proving to be “challenging,” he said.

“Banks need to replace that revenue (from loans) with non-interest income and that, given the current uncertainty we have, is proving quite difficult, whether it’s a lack of equity fund-raising, there’s a lack of investment, wealth management type products,” he said.

At the same time, banks are trying to balance the need to cut costs with the need to invest in future growth, KMPG said in the report. All these add to a very challenging few months for banks in Hong Kong, the firm added.

The firm predicts that the difficult conditions may force certain smaller players to review their business in the city and those that remain will have to consider reducing their services. He cited the examples of Macquarie Group, which sold its private wealth business to Julius Baer and Royal Bank of Scotland, which sold its Asian equity business to CIMB.

“I think that’s the kind of thing we should start to look and see that these banks are focusing more on where they're really good, where they can be Top 3 or a Top 5 bank,” McSheaffrey said.